Investment Strategies of Hedge Funds

14

Global Macro

We open this chapter by recalling Plato’s allegory of the cave, in order to tackle the topic of how to discern reality, or truth. In this context, market prices can be seen as the shadows of a reality that is all too difficult to comprehend. George Soros, with the theory of reflexivity, teaches us that market participants try to understand market performance and obtain the desired results by modifying reality without ever fully comprehending it. Therefore, prices are a manifestation of reality, but in turn they can influence and modify reality.

Global macro fund managers have the broadest investment mandate among the various types of existing hedge funds. Managers can invest on almost any market, using any financial instrument.

Their investment approach is typically top-down, as their choices are prevailingly based on the analysis of macro-economic variables associated with the different countries in which they have decided to allocate their capital. Market forecasts are generated by econometric models, trying to leverage the inconsistencies perceived by the statistical analysis of macro-economic variables, such as gross domestic product, balance of trade, public deficit, population and demographics, treasuries yield, equity market returns, prices of raw materials, exchange rates, etc.

Fund managers form their own view as to the prevailing trends on financial markets, and then try to capture returns by trading the main world macro-economic indices. They trade all ...